Taxability of Cash and/or Property Dividends Received by Individual Filipino Shareholders

November 29, 1999 BIR RULING NO. 190-99 Sec. 24 (B) (2); 73 (C) 190-99 Romulo Mabanta Buenaventura Sayoc & de los Angeles 30th Flr. Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Attys. Priscilla B . Valer and Jayson L . Fernandez Gentlemen : This refers to your letter dated May 21, 1999 requesting for a ruling that the cash and/or property dividends to be received by the individual Filipino shareholders of your clients, Antelope Enterprises, Inc. ("Antelope"), Mix Plant, Inc. ("MPI"), LLP Enterprises, Inc. ("LLP") and Golden Donuts, Inc. ("GDI") in 1990 will not be subject to income tax to the extent such dividends are declared out of each of the relevant corporation's retained earnings as of December 31, 1997. However, the amount of cash and/or property dividends declared by the relevant corporations in excess of their retained earnings as of December 31, 1997 shall, when received by the individual Filipino shareholders, be subject to income tax at the tax rates applicable in the year actually or constructively received as provided under Section 24(B)(2) of the 1997 Tax Code. It is represented that Antelope, MPI, LLP and GDI are all corporations organized and existing under the laws of the Republic of the Philippines; that all the shares of stock of Antelope, MPI, LLP and GDI are currently held by Filipino shareholders; that the financial statements of all four corporations as of December 31, 1997 and December 31, 1998 reflect unrestricted retained earnings available to be declared as dividends to their shareholders; that the respective Boards of Directors of Antelope, MPI, LLP and GDI will declare cash and/or property dividends out of their corporate profits earned prior to December 31, 1997 and payable to their shareholders in 1999. In reply thereto, please be informed that pursuant to Section 24(B)(2) of the 1997 Tax Code stating: "(B) Rates of Tax on Certain Passive Income. "xxx xxx xxx "(2) Cash and/or Property Dividends . A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and a regional operating headquarters of multinational company", or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; Ten percent (10%) beginning January 1, 2000. "Provided, however; That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax . (Emphasis supplied) dividends shall be subject to a final tax at the rates applicable in the year when such dividends are actually or constructively received by the individual Filipino shareholders as provided for under Section 24(B)(2) of the Tax Code (BIR Ruling No. 028-89 dated February 22, 1989 citing Am. Jur. 2d, 1976 Ed., Vol. 34, p. 180). However, the income forming part of retained earnings of a corporation as of December 31, 1997 shall not, even if declared or distributed as dividends on or after January 1, 1998, be subject to the final tax on dividends in the hands of the corporation's individual Filipino shareholders. Anent the above, Section 73(C) of the 1997 Tax Code further provides that "(C) Dividends Distributed are Deemed Made from Most Recent Accumulated Profits . Any distributions made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated surplus, and shall constitute a part of the annual income of the distributee for the year in which received." prcd Since the distributable cash and/or property dividend by Antelope, MPI, LLP and GDI will not solely come from the 1997 retained earnings, this Office hereby holds that, for purposes of computing the taxable portion, the amount that will be declared to the extent of the accumulated profits earned in 1998 shall first be subject to the six percent (6%) final withholding tax imposed under Section 24(B)(2) of the Tax Code. Only the amount in excess thereof shall be considered to have been distributed out of the relevant corporation's retained earnings as of December 31, 1997, and shall not be subject to income tax or any withholding tax even if such dividends are so declared or distributed after January 1, 1998. Moreover, property dividends which constitute stocks in trade or properties primarily held for sale or lease, which shall be distributed by Antelope, MPI, LLP and GDI to its stockholders and declared out of their retained earnings, beginning January 1, 1996 and thereafter, shall be subject to VAT based on the market value or zonal valuation whichever is higher, at the time of receipt. (BIR Ruling No. DA-173-97 dated April 16, 1997.) cdlex This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue